2014 EBSA Collection Totals Questioned

The dollar amount secured by the DOL’s Employee Benefit Security Administration dropped substantially in 2014 compared with the previous year, despite a higher number of cases closed and a similar number of violations found.

The totals come from 3,928 civil investigations closed by
EBSA in 2014, with 2,541 of those cases (64.7%) resulting in monetary
compensation for plans or other corrective action. Last year, EBSA reported
more than double the monetary collections arising from 3,677 closed
investigations, in which violations were found nearly 73% of the time. Taken
together, plan sponsors paid a collective $1.7 billion in plan reimbursements
and fines to EBSA to settle criminal cases and civil violations in 2013.
(The 2013 numbers are
reported here.)

The major year-over-year drop has left some in the
retirement plan compliance industry scratching their heads. As noted by David
Donaldson, a former senior investigator with the EBSA (2009 to 2011) currently
serving as president of the employee benefit consulting firm ERISA SMART, “It’s
not like there was suddenly a 50% drop in the number of noncompliant retirement
plans in 2014 compared with 2013.”

So what really happened to EBSA collections in 2014?
Donaldson, whose Ventura, California-based firm specializes in helping plan
sponsors address fiduciary liability, says his first thought after seeing the
new numbers was that EBSA audit targeting efficiency somehow fell off last
year, but that’s not necessarily the only driver. There was in fact a 9% drop
in the reported rate of cases closed with a violation found, but the dollar
value drop is far more significant, he says.

“The conclusion has to be that EBSA investigators are looking
at different types of plans and are finding different types of violations,”
Donaldson tells PLANSPONSOR.

“I
still talk to DOL investigators on a pretty regular basis, and they tell me
they’re really focused on health and welfare plans right now—I don’t think
there’s any doubt that is what’s behind the drop for 2014 collections,”
Donaldson says. “During my last quarterly training session while I was still an
investigator for the DOL, they were already instructing that for every 401(k)
or retirement plan we had in our case file, we were to go ahead and open up a
case for the health and welfare plan if one happened to exist. We can see now
that the focus on health and welfare is intensifying.”

Donaldson says this trend goes back to provisions of the
Patient Protection and Affordable Care Act (or ACA) granting EBSA the ability
to bill and get reimbursed by the Department of Health and Human Services (HHS)
for auditing work related to health and welfare plans.

“The way to understand this is to think about what happens
when the EBSA sends an investigator to a place like Hawaii for three weeks to
do plan reviews,” Donaldson explains. “You have to expect that it’s going to be
an expensive trip. The per diem is almost $110 per day alone, and when you
think about airfare, hotel costs, a rental car and gas, we’re easily talking
several thousands of dollars per trip per investigator.”

Now, under provisions of the ACA, the EBSA can defray some
of that cost by having its investigators look into the health and welfare plans
of the employers it’s examining.

“EBSA’s motivation also makes sense when you consider there
are about 707,000 pension plans in the U.S., compared with about 2.5 million
health and welfare plans,” Donaldson adds. “I don’t think that the average
monetary result significantly changed for retirement plan examinations in 2014,
but there’s no denying the average collection per case [among examinations for
all plan types] fell off significantly.”

Donaldson chalks this up to the fact that health and welfare
plans are generally easier to administer than retirement plans covered by the
Employee Retirement Income Security Act (ERISA). And when mistakes are found in
health and welfare plan administration, there is rarely a large sum of money
missing that must be repaid to participants.

“Let’s pretend I’m looking over a small pension plan for a
private physician practice,” Donaldson continues. “There are all kinds of
prohibited transactions that can occur in the plan that will be found by DOL
investigators. For example, the sponsor could be found to be self-dealing with
his wife, who is involved in selling and trading real estate trusts. In this
case, there can be major damages and lost opportunity costs to be repaid to the
plan. And then there can be delinquent contributions, and a whole host of other
ways money can be owed to plan participants.”

Health
and welfare plans typically don’t have such a big investment component to be
lost in the same way, Donaldson says. “If I have to make a correction in a
health and welfare plan, it will not necessarily have a major monetary result
that will flow into the plan.”

The EBSA did not return calls seeking comment about
Donaldson’s analysis, but the EBSA 2015 budget proposal to Congress (available here), shows it is not
expecting such low numbers to continue. For example, EBSA estimates that during
fiscal year 2015 it will achieve approximately $1.376 billion in total monetary
results by conducting about 3,300 civil investigations, “including 985
health-related civil investigations.” The same document suggests EBSA conducted
638 health-related civil investigations in 2013 and 699 in 2014.

Bradford Campbell, counsel at Drinker Biddle & Reath LLP
and a former Assistant Secretary of Labor who led EBSA from 2007 to 2009,
agreed that an uptick in health and welfare plan examinations is one possible
explanation of the substantially lower collection total for 2014. But he was
less confident about that conclusion than Donaldson.

“It’s certainly a possible explanation for what’s going on,
but I’m not sure we really know enough to speculate on that,” Campbell says.
“It helps to note that the $1.7 billion last year was one of the higher totals
we have seen collected by EBSA. So the drop by half in collections is somewhat
more muted than it appears.”

It’s possible this drop occurred without a major shift in
policy, Campbell says, though it’s hard to say for sure without getting a more
precise breakdown of exactly how many EBSA investigations targeted retirement
versus health and welfare plans in 2014. Campbell says the 9% reduction in
cases closed with collection results is probably a more important piece of data
than the sharper monetary drop.

“That 9% is a pretty significant drop in what has been a
very steady trend,” Campbell notes. “Historically, the agency has reported
success in audit targeting that is right there in the mid-70s. So to have it
drop so significantly in one year, especially when you combine it with the fact
that they are opening more cases, that’s important.”

There
could be a number of factors in play behind the efficiency drop, Campbell
notes. “One could be that EBSA has been focusing on service providers in order
to try and ensure compliance with fee disclosure rules that have recently come
into effect—and that has perhaps resulted in fewer violations by virtue of the
nature of service provider relationships with retirement plans.”

“If you’re investigating an adviser or service provider to a
plan, there are by definition fewer things the adviser is doing that you will
have to review than if you just reviewed the entire plan itself,” Campbell explains.
“So it may just be that you have lower success rates when you’re targeting
service providers than you do when you go after plans. It’s a smaller universe
of issues you’re looking for with the service providers.”

Another possible explanation Campbell offered is that EBSA
has traditionally resisted doing purely random audits. But in the past few
years there has been an interest by the Government Accountability Office (GAO)
and others inside and outside the Department of Labor to try and make EBSA do more
random audits—in the interest, they say, of being more transparent and fair.

“Those random audits would naturally have a lower success
rate than targeted investigations,” Campbell says. “So it may be that there is
a built-in number of audit’s in this year’s total that, in the past, the agency
would simply not have conducted, and this in turn drove down the audit success
rate.”

Whatever the cause of the efficiency drop, Campbell says
EBSA leadership will undoubtedly be aware of it and will be looking into why
the substantial drop in collections has occurred.